Why Should The Banks Be Broken Up?

As much as I detest the involvement of the government in what are supposed to be free markets, I can appreciate the need for Uncle Sam’s stepping in to save our banking system in late 2008.

Now going on five years hence, it is time that we move to save capitalism. How do we do this? We need to break up the banks. Why so? Here’s a handful of reasons why:

1. Since 2008, the then too big to fail banks have only gotten that much bigger and hence would require that much more of a government bailout. Does anybody believe that the system could support itself without further government intervention? Really? In light of this information:

2. The four largest banks write approximately 50 per cent of the home mortgages in our country and issue close to 70 per cent of the credit cards.

3. The six largest banks hold assets close to two-thirds of the country’s GDP.

4. The five largest banks hold approximately 95 per cent of the derivatives. Can you say too big to fail right here?

The marriages of the banks – – – both by choice and by shotgun – – – have brought us a system that is not reflective of free market capitalism but one that is the essence of an oligopoly.

What are the key factors at work within an oligopoly?

1. Ability to set prices.

2. Barriers to entry across a wide array of business lines are VERY high.

3. Firms within the oligopoly can retain long run abnormally high profits.

4. Firms within the oligopoly can and will share, retain, and withhold perfect information and knowledge.

5. Individuals, firms, and institutions outside of the oligopoly do not have access to that information and knowledge and pay the price literally and figuratively in the process.

What is the other consequence of this oligopoly which has been developing on Wall Street over the last few decades and has only escalated as a result of the crisis?

Cronyism.

Think of the major scandals on Wall Street and how they tie into this economic system.

1. The manipulation of Libor and other overnight interest rates that has likely been going on for the better part of the last twenty years.

2. Money laundering within the Treasury operations of the largest banks.

3. Price controls and glorified front running on the equity exchanges that are dominated by the trading of the major Wall Street banks.

4. Insider trading within hedge funds that is very often facilitated by the prime brokerage operations of the largest banks.

Shall I go on?

The oligopoly and cronyism is only further exacerbated by financial regulators — and especially the self-regulatory model – – – that operates really more like a pack of ineffectual meter maids than real financial cops. The oligopoly largely pays for its own regulation. How is that working? That model is rife with massive conflicts of interest.

What is the result of the oligopoly and cronyism? A pervasive lack of trust and confidence in our markets, our economy, and our government.

I firmly believe that breaking up the banks, reinstituting Glass-Steagall, and ending the self-regulatory model on Wall Street are issues that an overwhelming percentage of people within our nation will embrace and pols from both sides of the aisle can get behind.

America’s liberals have long demanded that the largest US financial groups be forcibly broken up following the financial crisis. Now, an increasing number of influential conservatives are joining their cause.

Republican lawmakers on Capitol Hill have introduced legislation and written letters urging government officials to study the allegedly harmful effects on financial stability and economic growth posed by “megabanks”.

Increasing attention on Capitol Hill coincides with rising attention among influential Republican commentators such as George Will of the Washington Post, Peggy Noonan of The Wall Street Journal and Erick Erickson of the blog RedState, who have argued that Republicans should embrace the idea of breaking up large financial groups.

“It is absolutely a conservative imperative to break up the big banks,” Mr Erickson recently wrote on his blog. “If we want smaller government, we need smaller banks too.”

Some regulators including Thomas Hoenig, Federal Deposit Insurance Corporation vice-chairman, have wanted to break up big banks for years.

Dallas Fed governor Richard Fisher is also a proponent of breaking up the banks and is speaking on this topic on Wednesday. I will speak on this topic this evening at The Monday Meeting in New York City.

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

“I firmly believe that breaking up the banks, reinstituting Glass-Steagall, and ending the self-regulatory model on Wall Street are issues that an overwhelming percentage of people within our nation will embrace and pols from both sides of the aisle can get behind.”

Crystal clear – what are the odds that congress can conjure up the collective wisdom to act accordingly?

I been saying all along! We needed to bail out the banks to preserve our credit system, but instead of reducing the size of banks, we’ve made them all behemoths that cannot be allowed to fail. All that really seemed to happen was banks took this as a sign to screw as many citizens as possible..Those who bailed them out and use the funds to reward upper management with over-sized bonuses. We do need to break them up into bite size pieces and plan on letting them flounder next time we have a big issue. In fact, a return to Glass-Steagall wouldn’t hurt either.

coe

The global banking system is filled with conflict and inconsistencies…all exacerbated by the financial crisis fix…take a look at RBC, to most casual observers a conservative, credit sensitive Canadian “good” bank…do people know they earn an outsized proportion of their revenue by running a prop trading book – right in NYC, under the noses of the US regulators and in the shadow of the Volker Rule discussions..just one example…take a look at the recent mortgage settlement re servicing sins…does anyone realize the cost of consultants that was nipped in the bud by “settling” – astronomical fees avoided and individuals in a dozen or so categories of being wronged will get a small check – what about those individuals who didn’t file, or those who happened to be wronged a day before the settlement window opened…how can we reconcile the seduction of becoming a global powerhouse against the inefficient new demands of regional regulatory demands, ring-fencing, depositor preference, and subsidiarization? I’ll give you the answer – we can’t! When one even tries to calculate the man hours burned in the new regulatory regime – on CCAR/DFAST/MRAs/MOUs – the price is staggering…and do we have a safer and sounder financial banking system – hardly…the ONLY answer is to think Small Is Beautiful…or be damned with the deposit insurance subsidy and let the free markets shape the future…Too big/too complex/too unmanageable/too anachronistic – have you read the report in the weekend’s business news that Jamie Dimon’s $24MM bonus range is actually threatened by the multi billion trading loss – are you kidding me? Whether you break it down on a logical level, as you have in your article, LD, or go visceral, any way you slice it…banking needs global reform and it needs it yesterday…breaking them up, downsizing, separating banking from commerce – all steps worthy of consideration and implementation to restore sanity and safety to the global financial system…one man’s opinion

Jay

Once a company reaches a critical size it operates internally and externally like a political institution rather than an economic one

Joe

Amen. If banks were allowed to go under, I would have no problem with size as investors would force the bank to act in a more conservative fashion to protect the capital.

As the banks have de facto government backstop, bankers are incentivized and almost forced to keep up with the Jonses by keeping the pedal to the metal.

I would prefer a true capitalistic society where the banks were allowed to fail. I do not believe that will come about for a variety of reasons and as a result the banks must be broken up and regulated.

Ed

It got this way due to our government “helping” people by intervening to “fix” problems. In turn each time they did this the laws were written at the same table as the banks themselves and their input was accepted and included.

As in so many sectors of our economy the private sector wrote in that if you’re going to cost me money with these “fixes” then by god you can’t let the next guy into the space cheaper!

Thus barriers to entry and oligopolies in every sector our government “helps”.

Show me the sector that is screwed up and i’ll show you the sector our government has “helped”. I’m done asking the government to “fix”, it’s got to stop.

Barry

Great piece, thanks.

http://stock-index-options-alert.blogspot.com/ TC

My once long-developed, informed suspicion that, the trans-Atlantic banking system in the post-Bretton Woods era was founded on a Ponzi scheme effectively is confirmed with such capture of the Federal Reserve as has been necessary to perpetuate fantasy supposing financial structures in place throughout the trans-Atlantic banking system are sustainable. QE infinity belies this conclusion, thus producing circumstance relegating the Fed to being entirely compromised–insolvent–at this point. Thus, the wisdom of Glass-Steagall as a simple form of regulatory constraint elevating due diligence to its pre-Greenspan (King Ponzi!), stability-enhancing functional imperative more or less is indisputable.

Yet if Glass-Steagall is to be reinstated, then every weak flank compromising sound economy ought be attacked. All manner of operations, inside and outside the realm of finance, whose effect has compromised and destroyed the American System elaborated and practically developed by key personalities among the nation’s founders need be arrested and either reformed or abolished (and I would lump the private Federal Reserves System into this, now having met its intended, destructive, imperial end, albeit having taken a century to do so).

Beyond Glass-Steagall, a modern-day Pecora Commission, as well as resurrection of the Bank of the United States, there’s also the matter of the need to reject such neo-colonialism as animates a so-called “military-industrial complex” whose part in what you call “oligopoly” likely is more than just casual. Indeed, it is possible conflicts precipitated by organizations ascending over the past decade with the imposition of a national security state apparatus may have been manifest in last month’s Newtown, CT slaughter.

One thing certain is all things are not what they seem, and the American experience especially over the past decade or so has born this out in spades. To think American media is not more or less captured by an “oligopoly” maintaining a firm grip over finance and the body politic seems nothing short of naive. Thus their story lines at first blush are best not believed. We see this plainly in matters relating to finance. Should we not suspect the same in their reporting of murderous slaughters taking the lives of innocent children for God’s sake? Indeed, there is plenty of evidence raising such suspicion, least of which is the media’s silence in the face of it, preferring instead dead end pursuit of the “gun control” meme. As much as this consideration might seem off topic, I believe it is not. All one need wonder is the extent to which crime we agree is endemic is reaching.

LD

Firms within the oligopoly can retain long run abnormally high profits.

The big kids on Wall Street had a big fourth quarter. JPMorgan made $1.39 per share, up 54 per cent versus a year ago. Goldman Sachs earned $5.60 a share, more than tripling the fourth quarter of 2011. Both results beat analysts’ forecasts, but the profit surge was not a surprise – it had been anticipated, after all, by the rally in both banks’ shares over the past year. JPMorgan, despite its $6bn “London whale” trading loss, returned 36 per cent in 2012, and Goldman 43 per cent, versus 16 per cent for the S&P 500 in 2012. Can the run continue?

fred

LD,

Why not require banks to reserve to market and report to model up to par and then reserve to model and report to market above par?

Why aren’t banks required to pay a decent return to depositors (spread to treasuries/money mkts) before bonuses or dividends?

LD

Fred,

I think we are starting to see a little bit of a shift in the direction of taking care of shareholders first. The pressure applied on Morgan Stanley by some high profile shareholders certainly seems to have had an impact on MS management and its compensation practices.

In regard to requiring banks to reserve appropriately, the bank lobby would clearly — and still does — play the card that to do so would inhibit the flow of credit. We have heard that argument ad nauseam including from the likes of Freddie and Fannie and the banks themselves as they ran themselves and our economy into the ditch with the regulators and legislators in the passenger seats providing cover.